“For many people, paying off debts early isn’t the no-brainer you might think it is,” according to this U.S. News article by Geoff Williams.
When times are good (or good enough) and the money is rolling in, maybe due to a raise, windfall inheritance, holiday bonus, investment gone right or some other influx of cash, it’s easy to wonder: Should I pay off a debt early? After all, debt, we’re told, is bad. Carry it if you must, when you buy a house, car or take out student loans, but get rid of it as soon as you can.
But you shouldn’t necessarily pay off your debts early, many experts say. You could end up fixing one problem only to create another. So if you’ve ever wondered whether you should pay a debt off early, here are the pros and (a lot of) cons to ponder.
The pros. The main plus to paying off debt early is that you no longer have to fork over money to a lender; you’ll now have extra money to spend on other things. You can also potentially save a lot in interest payments.
In fact, according to a lifetime cost-of-debt calculator from Credit.com, a typical person will likely pay $279,002 of interest on credit purchases over the course of his or her life. And that’s assuming you have a fair credit score of 620 to 679. The crummier your credit score, the more money in interest you’ll pay throughout your life. And nobody wants that. If you can pay less money in interest, that’s the dream.
You also may avoid stress and anxiety by paying off a debt early. But that’s all pretty obvious. The negatives of paying off debt may not be as clear.
The cons: You may lose some of the benefits of having debt. There are benefits? Yes, debt can have a bright side.
Rosie Brown, a creative project manager at a communications company in San Francisco, paid half of her student loans off in what she says was a move of impatience, and she quickly regretted it.
“I paid off a large chunk because of the weight that debt put on my mind, knowing I would owe so much money for the next 10 years or so. I thought if I could pay off a few of the loans, I could reduce my monthly payments and feel better.”
And so Brown took $15,000 from a college savings fund that her parents started when she was a baby, and used it to pay down $23,000 in student loan debt. While she didn’t do anything foolish – it isn’t as if she used the money to make bets on the horses – Brown regrets using the money to pay down that student debt.
The way she sees it, spending that $15,000 on student debt, instead of letting it sit in her checking and savings account, robbed her of several opportunities.
- Creating that credit history. Brown says the student loan payments are establishing a history of making loan payments on time.
- Having tax deductions. “More interest paid equals more tax deductions, though not by much, really,” Brown says.
- More cash flow. She would have had more cash flow “to invest without becoming more dependent on credit and borrowing,” Brown says. Plus, it isn’t as if the lenders were beating down her door, demanding her to pay off debt early. The extra time to pay off the loans and that money in the bank, Brown says, would have been “super helpful … as someone fresh out of college and just starting their career.”
